Do we really want to try and keep inflation at 2%?

By Andy Shaw | January 23, 2010

Originally Posted 12th July 2007

This is opening up a can of worms :-)

You know this obsession the government and therefore we ourselves have about trying to keep inflation at 2%. Well I’ve been wondering for some time now, and a lot more recently as to whether we really want to try and keep inflation at 2%?

When I think about inflation I hear the voice of my Mum telling me of the terrible times in the early seventies when the price of a loaf of bread was going up each time she went shopping. I also saw on the news yesterday about how bad the hyper inflation in Zimbabwe is working out for them.

On a side note I had relatives who were white farmers there. They are now living in Australia and when I first went out with Alison back in the late eighties I predicted that one day they would be kicked off their land and the government would collapse under hyper inflation. Well the prediction has nearly come completely true, watch this space.

Then I think about the hyper inflation that happened in Germany after the First World War and I must admit the thought of too much inflation does worry me, especially if you have someone who is too cavalier at the helm.

However, I also think that having someone who is too set on keeping a definite course when it is obvious that a correction is needed is also very scary. I take it we all remember when the government tried to keep the value of the pound in the right area and raised interest rates several percent in a day. That’s not several 0.25% rate rises like we have seen in the last year, that’s 3 times as much as we’ve had in the last year in ONE DAY!

I remember Margaret Thatcher saying that you can’t buck the markets, and she was right. And I think what is going on now is an attempt to control something too harshly to the detriment of the economy as a whole. I know even bringing up this topic for discussion is really going against the grain, but then that’s me really. The trouble I have is I think the government is trying to buck the markets and keep inflation at 2% when it should be allowed to grow a little.

I agree that we do not want to see too higher inflation, and I am not saying that I’m enough of an expert to give an accurate statement of what the correct level of inflation should be. But I think it should be an open subject rather than closed off the way the government seems to want it. And because nobody fully understands the subject (including me :-) ) nobody is really even questioning this policy, it is just considered a given that very low inflation is the correct path. And even if I didn’t understand the effects of inflation the way I do then the very fact that everyone believes in something is enough of a reason for me to question it, as I believe when opinion is in the majority regarding this sort of thing then the chances are it is probably wrong.

First off, what is the real rate of inflation, because if you take all factors into consideration including house prices then you’ll almost certainly find that inflation is a lot higher anyway, and I’m just guessing here but probably around 6%. So is this just the government trying to disguise the underlying rate of inflation or are they just inept.

Let’s just say that the true average inflation rate wants to be 7%, and the government has entered a period in history when the rates are well below this level and likely to remain that way for several years for example say the year 2000, because as with all markets the market swings high and low. So now let’s say when we were in one of those low rate swings we decided to set inflation at 2%. We made political headlines out of it and as my bank manager would say, we hung our hat on it, in other words it’s a fixed policy. Now lets say that because on normal market progress in other areas, such as business growing at more than 2% a year and property rising at more than 2% a year for several years then the underlying rate would be well out of whack with current policy. Then this would mean all of a sudden we were working to keep the economy artificially low. Is this a good thing?

I’m not sold on it, or rather as far as I’m concerned the jury is still out!

Furthermore the Bank of England will continue to raise rates in an effort to fight the increase of inflation. Well how much are they prepared to buck the markets, a 3% rise in a day perhaps? Maybe they are prepared to do that again? For reference on a £100,000 mortgage that would be a monthly increase of £250, or a better way of putting it, would be rates going from 8% to 11% (Why 8% well they wont be doing a quick rise from where they are now, will they? Things will have gotten worse K). So if they do not change this policy then we could once again see double digit interest rates. Nasty!

The problem is that the government is trying to keep things down, yet it is considered the norm for a 5% wage increase now in most businesses. And in the city 5% it would seem that this sort of increase would be chump change. So why are we trying to keep something at too low a level when a more acceptable rate would help the country to grow further?

In the US the long term house price to earnings ratio is 2.6 times and currently it is at 3.4 times depending on what source you go to. Off the top of my head I don’t know the UK figures. I hear the economists saying that house prices cannot continue to go up as people cannot afford to buy any longer because this ratio is out of whack (I don’t think the economists use the term ‘whack’ though!).

The problem is that is it right to hold back wage rises when the country wants to expand, is it more likely that the government needs to hold back wage rises because of the growing army of civil servants and the potential ‘knee in the nads’ a 5% wage rise annually could do for the governments budget. The problem is that are they fighting the just cause of low inflation for the right reasons, or are they fighting it because they need to keep under control a mess that they are not capable of clearing up.

My conclusion is I think that what will happen is the government will see sense and see that they can’t fight inflation without damaging the economy too much and as such will raise their expected inflation rates to around 3% for next year.

The trouble is that I think this is too little and they need to relax it a little more and let the market breath. They can easily bring in the constraints by raising interest rates harshly if the economy starts to move too quickly. As this will cause us all to suck it in pretty quickly!

When I learned to fly I was taught the value of being flexible on my course, and if I did that then I would have a far greater chance of reaching my destination, basically that meant flying around the storms. My opinion is that if the government carries on heading in their current direction then I think a tidal wave will capsize them as they are not even prepared to head into the wave!

Best Wishes

Andy

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A couple of interesting way points in the papers today

By Andy Shaw | January 23, 2010

Originally Posted 11th July 2007

The first was about Gordon Brown announcing his plans ahead of time and breaking with tradition to do it. This increases my belief that an early election will be called as he needs to get these positive changes in early so that he can rank up the pressure to why he should stay as quickly as possible so that he can capitalize on the poll rating boost which seems to be common around new leaders.

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Economic Well Being and Financial Capability

By Andy Shaw | January 23, 2010

Originally Posted 10th July 2007

Economic Well Being and Financial Capability

This is the new lesson that school children aged between 11 & 16 will be studying. On the face of it this looks like a wonderful idea and hopefully when I get to see what they are teaching them, then I’ll be able to say it is a good plan. As the skills this is going to teach (well I’m assuming now) are some of the essential needs.

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Will they rise the base rate? Part 2

By Andy Shaw | January 23, 2010

Originally Posted 3rd July 2007

These people know what they are doing so if you are going to America shortly then I would change your money before Thursday at 12.00pm as it stands at $2.015 for just £1. Me, if I was a betting man would be looking at putting a short in place on the currency as the whole market seems to be pointing towards a rate rise then this would make staying static a contrarian bet.

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Will they raise the base rate?

By Andy Shaw | January 23, 2010

Originally Posted 2nd July 2007

There’s a hell of a lot of chat about interest rates this week. I’m left undecided as to which way they are going to go, but my best guess is at the bottom. I think there are a lot of factors to take into consideration. Before I go into them though I think that raising rates at a quick pace without waiting to see the effects of previous interest rate rises is foolhardy.

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University Tuition Fees

By Andy Shaw | January 23, 2010

Originally Posted 22nd June 2007

There was an article the other day in The Times saying that Student debt has reached over £3 billion.

Now when you first hear that it sounds pretty scary but I look at it that there are a lot of people willing to invest in their own future.

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Should the government do away with Tax relief on Mortgage Interest?

By Andy Shaw | January 23, 2010

Originally posted 22nd June 2007

Hi,

There was an article in The Times the other day that went on about one of the possible solutions to rising house prices was for the government to take the tax relief away on buy to let properties.

The article went on to say how unfair it was that buy to let investors had an advantage over first time buyers. It amazes me that people look at things in such an unbalanced way.

First off the buy to let investor isn’t necessarily the first time buyer nemesis, at times yes but across the market as a whole definitely not as the BTL investor takes up still such a small percentage of the market. Then it assumed that the BTL investor was taking away from society instead of adding to it.

There was a comment by a man from Dorking who said he was at a housing aid centre in the 1970’s when he saw the problems caused by a lack of rented accommodation. People with good jobs were effectively made homeless because there was then no rented property available.

The reason BTL was originally brought about was that there was a shortage of rented accommodation and the BTL investor provides an essential service that the government does not want and almost certainly is not able to provide.

They also are forgetting that this is not a game to the BTL investor, they are in this for the business opportunity and any other business that borrows to fund its equipment can deduct interest from its taxable income, so I think it would be pretty difficult to bring this in, even if the government would want to.

Best Wishes

Andy

Topics: Free Content, Property | Comments Off

Hips fiasco continues

By Andy Shaw | January 23, 2010

Originally Posted 15th June 2007

Surprise, surprise there’s a loophole in the government regulations regarding HIPs. This is for the people who are left having to take up a HIPs pack, i.e. 4 bed houses and above.

Obviously every major body is trying to get the government to make a U-turn on this poor idea, but the judgement on that will have to wait a while.

Anyway, the rules state that a pack has to be commissioned when a house is put on the market, but it does not have to be ready before contracts are exchanged.

So I’m setting up a company that will prepare your HIPs for you, that charges just £100 up front so that you can legally state you have applied for it and then my company guarantees 100% to have the HIP’s pack ready for you at some point in the next 10 – 100 years. Please make cheques payable to ‘Thanks again for another loophole Ltd’

When I first discussed HIPs with Julian, I said there would be plenty of loopholes and he said it, ‘nah it would be scrapped altogether.’ I think he could be right, but the jury is still out at the moment, and as I regularly say, they make the rules we just play by them.

Topics: Free Content, Property | Comments Off

The Apprentice

By Andy Shaw | January 23, 2010

Originally Posted 14th June 2007

I watched the final of the Apprentice last night and really enjoyed it. I don’t particularly like watching the candidates as they go through the tasks as I find them very negative at times, but I have to watch that bit so that I can evaluate Alan’s decisions. I think that this show is excellent at showing people what I already know, that business is fun, challenging, rewarding and that business does not need to be stuffy. Alan himself is a great character as well and even though I don’t agree with the way the TV show would have everyone believe that business works, I think his remarks are excellent and just getting one remark makes the whole show worth watching.

His insight into why he chooses people is excellent, he may not be the best businessman in the country but there are little snippets you can pick up from this expert he has a wealth of experience that has led him to a great profit.

I said in an article a couple of months ago that a large portion of Alan’s wealth was now being made out of property investing and what I didn’t say was that I thought he is no longer really having as great a success in his other business operations as he could have. Because I felt that he made some wrong decisions when he did have market share. That said he is still one of the countries richest men and will stay that way thanks to his Real Estate ventures.

Anyway last night in the show, he said that his business interests were now mainly heading towards real estate. Which I’m sure at some point he will say that have made him more money than all of his other business interests put together.

Topics: Business, Free Content | Comments Off

What Is This Pre-Occupation We Have With Luck?

By Andy Shaw | January 23, 2010

Originally posted 12th April 2007

I was just reading an interesting Blog article on the site and a comment where someone asked the reader to wish them luck.

I am always saying to people that there is no such thing as luck, to which most people think I’m on drugs.

The problem is they are relying on something they cannot affect, whereas I believe there is no such thing as luck so therefore I know I can make whatever I want happen, simply by making a choice and the choice is to make it happen or not.

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